This morning the Senate passed their tax reform bill. Now it gets reconciled with the House bill. There will be a reduction in the corporate tax rate from 35% to 20%, and it appears that the estate tax will phase out and be eliminated. To make up for the loss in tax revenue, many deductions will be cut back. At this point it seems that it is very likely that state income taxes will no longer be deductible on your federal return. This has been a deduction since the individual income tax was approved by Congress in 1909. The property tax deduction will be capped at a $10,000 per year. There is no current cap now. The House has a mortgage interest deduction cap of the interest on a $500,000 loan, while the Senate was shooting for a $1,000,000 loan cap. The current cap is interest on a loan of $1,100,000. We will wait and see what this ends up at. I will keep you informed primarily with regards to cuts in deductions for mortgage interest, property tax, and state taxes.
Economic update for the month ending November 30, 2017
Stock markets skyrocket in November – Tax reform, a new CFPB Director, and new Fed Chairman were considered to be a trifecta for investors. The Dow broke 24,000 just 33 days after breaking 23,000. As tax reform crossed several hurdles in November, stocks rallied at each step. First, it passed in the House, then reached a crucial vote to move to a full vote in the Senate. As the month ended it appeared that the Senate had the votes to pass. Key to the massive rise in stock prices, this year is a reduction in corporate income tax from 35% to 20%. This is the same rate passed by the House. Investors are feeling that this substantial reduction in the corporate tax rate is a done deal. Other news that ignited the markets was the appointment by President Trump of Mick Mulvaney as director of The Consumer Financial Protection Board. The CFPB was set up after the 2008 financial collapse. While the acting director has refused to leave and has filed suit to keep her position, a judge preliminarily approved Mulvaney’s appointment. Mulvaney is considered much more friendly to financial institutions and less consumer friendly. It is widely felt that many regulations will be rolled back. Financial institutions, who feel they are over regulated, were ecstatic about the appointment. Lastly, Jerome Powell was appointed by President Trump as Chairman of the Federal Reserve to replace Janet Yellen, whose term ends next February. The Dow Jones Industrial Average ended the month at 24,272.35, up from its October 31 close of 23,348.74. The Dow is up over 22.6% year-to-date. The S&P 500 closed the month at 2,647.58, up from its October close of 2,572.84. The S&P is up over 18% year-to-date. The NASDAQ closed the month at 6,873.97, up from last month’s close of 6,701.26. It’s up 27.2% year-to-date.
Stock markets closed slightly lower Friday, December 1 after Mike Flynn pleaded guilty and agreed to provide information to the special council in a plea deal. The Dow Jones Industrial Average ended the week at 24,231.59, up from 23,557.99 last week. The S&P 500 closed the week at 2,642.22, up from its close last week of 2,602.42. The NASDAQ closed the week at 6,847.59, down from its last week’s close of 6,889.16.
Treasury Bond yields mixed in November –The 10-year Treasury bond closed on November 30, 2017 at 2.42%, up from 2.38% at the end of October. The 30-year treasury yield ended the month at 2.83%, down from 2.88% last month.
Bond yields dropped Friday, December 1. The 10-year Treasury bond closed the week at 2.37, up from 2.34% last week. The 30-year treasury yield ended the week at 2.76%, unchanged from 2.76% last week.
Mortgage Rates stable in November – Rates remain at historically low levels. The November 30, 2017 Freddie Mac Primary Mortgage Survey reported that the 30-year fixed mortgage rate average was 3.90%, down slightly from 3.94% on November 2, 2017. The 15-year fixed was 3.30%, up slightly from last month’s close of 3.27%. The 5-year ARM was 3.32%, up from 3.23% on November 2.
Third quarter GDP upgraded – The Commerce Department reported that the second estimate of the Gross Domestic Product, the broadest measure of the healthy of the economy rose 3.3% from an initial estimate of 3% in the third quarter.
California jobless rate falls to 4.9% – California posted strong job gains in October adding 31,700 net new non-farm jobs. That brought the state’s unemployment rate down from 5.1% in September to 4.9% in October. Wage growth slowed as hourly wages were 3.2% higher in October from one year earlier, down from September’s wage growth of 3.8%, according to the U.S. Bureau of Labor Statistics. California is outpacing the U.S. as the national rate of wage growth was 2.4% in October.
California existing home sales and prices – An extremely low supply of housing for sale resulted in a downtick in year over year sales in October, and continues to drive prices up. The California Association of Realtors reported that existing single family home sales totaled 431,020 in October on a seasonally annualized rate. That represents a 0.8% increase from September, but a 3.4% decrease from last October’s sales pace. The statewide median price was $546.430, up 6.1% from October 2016. The unsold inventory index dropped to a 3 month supplyof homes for sale in October from 3.2 month supply in September. There was a 3.4 month supply of homes for sale in October 2016. Year over year there are 11.5% fewer homes for sale this October than last October. Pending home sales (homes that went under contract) also dropped 2.6% from last October.
New home sales pace at highest rate in a decade – U.S. New home sales increased 6.2% in October, the Commerce Department reported. It was the the third straight monthly gain, and the highest new home monthly sales pace since October 2007.
New housing starts rebounds in October – The Commerce Department reported that new housing starts jumped 13.7% in October. That was the highest level since October 2016. September’s new home starts pace was down considerably because of a very steep drop in new construction in hurricane damaged areas. Because September’s figures were depressed a 13.7% month over month increase is not as exciting as it sounds. Yet it was the highest number of permits pulled for new home construction since October 2016.
The November jobs report will be released next Friday. The final monthly economic e-blast won’t be in the system and postcard won’t be done until we have those numbers.